The Crisis And The Opportunity

The Crisis & the opportunity

"The bigger the economic decline, the greater the acceleration, of what economist Joseph Schumpeter called creative destruction. This is the cycle where a recession causes declining industries and marginally successful business models to disappear faster than they would have if the national economy had continued to grow."

This truly remarkable quote comes from Alec Levenson, a senior researcher at the USC Marshall Center for Effective Organizations. It is a quote that echoes what I have been chewing over, ever since we saw the impact of COVID-19 hitting our industry with brutal force.

Let's start with a quick review of how COVID-19 has impacted the airline industry.

ANALYSIS OF IMPACT  

At the beginning of 2020, across the world, flights were operating either at or near to the previous year's numbers. Even in China and South Korea, the two countries that saw an initial impact, the number of scheduled flights were at or also above as the previous year. Airlines since have confirmed that they were initially slow to take drastic actions in response to the spreading crisis. However, as the pandemic started unfolding and impacting countries globally, schedule adjustments quickly picked up, leading to the nearly complete grounding of almost all players.

By the 1st week of April, schedules were down by 60% on a global level. Considering that around 50% of the world's cargo capacity is being carried in the bellies of passenger flights and factoring in the number of repatriation flights that operated globally, one can clearly understand the magnitude of the cuts that were made by the airlines.  An analysis by Airlines for America, a North American trade group, demonstrates how empty the planes are, which are still flying. During the second week of April, flights within the United States carried an average of about 12 passengers, while international flights carried an average of 26 passengers. Another telling stat by the same group shows the multiple dimensions of this problem.

Demand for future air travel in the United States reduced by 98.4% as compared to the same week in 2019. Consequently, ICAO predicts passenger numbers to drop by 1.2 billion globally, which is nearly 30% reduction compared to 2019, as a result of vanishing demand.

This unprecedented drop in flights in operation, with an amplified drop in revenues, is impacting airlines on two fronts. As more flights get cancelled, unearned revenues will lead to cash outflows. A significant drop in future bookings has caused an immediate liquidity crisis for most airlines around the world. Many carriers have publicly shared their state of affairs. Lufthansa Group is losing 1 million Euro per hour. Delta Air Lines went on record with a USD 100 million liquidity drain every day, which they expect to reduce to "only" USD 50 million. 

According to ICAO, in mid-April, the industry was set to lose between 160 to 218 billion USD in a best-case scenario, provided first signs of recovery will be shown by early June. A U-shaped path, assuming a recovery in the third quarter, was putting these losses in gross operating revenues to range from 218 to 253 billion USD. A study published by IATA paints an even bleaker picture: It expects the near-total shutdown of activities around the globe to, directly and indirectly, wipe some 25 million jobs out of a total of 65.5 million jobs in aviation, including travel and tourism.

Around the globe, governments were reasonably quick to provide liquidity in support of entire industries, including aviation. It is provided in the form of loans, guarantees, and support packages for employees to outright nationalization. However, with no end in sight for when the containment measures will fade out, and without a clear plan of what a global protocol might look like to ensure the health of passengers, it's clear that we are witnessing a truly destructive impact to our industry.

The duration of the crisis, the impact on the players in this industry, and what the new order post-COVID-19 will look like - all these aspects are driven by uncertainty.

Ed Bastian, CEO of Delta, confirms this: "Whether it is three years or two years or four years is anyone's guess." Or as a Chief Commercial Officer of an airline recently commented, tongue-in-cheek: "There is only one thing that is certain: Alitalia will survive us all."

UNPRECEDENTED DISRUPTION WITH COVID-19 - SHIVA

 

According to Wikipedia, Shiva is one of the principal deities of Hinduism. Shiva is known as "The Destroyer" within the Trimurti, the Hindu trinity that includes Brahma and Vishnu.

Is COVID-19 "The Destroyer" of the aviation industry?

Clearly, the answer is no.

However, Shiva will most definitely destroy many elements that are today, the defining pillars of our industry

Covid-19 has forced us to relook at the many elements that are today the defining pillars of our industry. Habits die hard, they say. But the time for change is inevitable and these habits need to change!

With very few exceptions, corporations around the globe have implemented capabilities to support working from home for the vast majority of white-collar work. In record time, the world has upgraded itself and its necessary IT infrastructure. Within four to six weeks, companies made changes to work rules, including the support from workers' councils, changed processes, and have overcome what in many companies were "this can't be done in our company" attitudes. Most importantly, employees that haven't previously experienced working from home and general sceptics have overcome their aversion to teleconferencing.

Why does that matter, though? It matters because these habits that were broken will not return. Employees all over the world are experiencing first hand that it is possible to conduct meetings with colleagues in different parts of the world, virtually. Business meetings are being conducted virtually. Projects are being implemented remotely, and at IBS Software, we are at present implementing software entirely remotely for areas as mission-critical as OCC and PSS. And if people still have doubts over the long-term viability of this approach, I encourage studying the latest initiative launched by Airbus, dubbed "e-delivery" - an almost entirely virtual handover of aircraft to airlines.

The consequences?

1. Travel demand will change

Inevitably, business travel will be impacted, and airlines are already expecting a drastic decline in future demand.

"We will have some portion of travel that will move over to telecommuting," Delta's Bastian told CNBC.

2. Available inventory will change

IATAs most recent expectation that revenues of more than 300 billion USD will be wiped out also comes at the expense of the available inventory.

At present, it is expected that a total of 8000 planes will be grounded by September 2020.

Capacity, often measured in ASK, will shrink. Airlines will accelerate retirements of aircraft, many will never return from their temporary storage and will get scrapped. Airlines will exit the market or will be forced to merge with others. In a normal world, this should lead to higher yields, when customers with a higher propensity to spend will compete with those that are stimulated by price initiatives alone. But this will only be a cosmetic correction when looking at the magnitude of losses that airlines will have incurred until travel resumes.

3. Available income will change

We are only a little over four months into the pandemic. And less than two months, since the so-called western world started to see this as a global risk to its societies and economies. We saw the same patterns repeating in almost all countries as the virus began its deadly journey around the globe:

Denial, followed by expressions of confidence, followed by lockdown measures in varying degrees and a parallel contraction of economies. Never before did more people apply for unemployment benefits in the US in such a short period. An unprecedented number of employees in Germany are getting aid from the government. Within six weeks, more than 700,000 companies have applied for short-term work, a tool where institutions top up employees' salaries to a maximum of 67%, thus encouraging companies to keep their workforce while getting relief on the payrolls.

Nevertheless, none of these measures will be enough to ensure that discretionary spend will be available. If people are not dismissed, employees will still suffer an income hit, and in addition, many might be forced to take paid or unpaid leave. In any case, when the "new normal" is here, up to 40% of employees worldwide will have suffered financial impacts and might have foregone their annual leave. While opening borders may pose an opportunity for business travel to resume, leisure travel may not rebound before 2021.

According to one of the latest surveys by IATA, more than 40% of air travellers will wait six months or more before resuming their flying patterns, assuming that disposable income returns to normal. 

THE RESILIENCE OF TRAVEL - VISHNU 

😐
 

Vishnu is one of the principal deities of Hinduism. The "preserver" in the Hindu triad, Vishnu, is revered as the supreme being In Vaishnavism and is notable for adopting various incarnations to preserve and protect dharmic principles, whenever the world is threatened with evil, chaos, and destructive forces.

Is Travel "The Preserver" of the aviation industry?

Plain and simple: Yes


In spite of the many uncertainties that came with COVID-19, a few emerging trends do stand out and help in restoring our confidence in the travel industry.  

1. Leisure travel will persist as habits die hard!

The World Travel and Tourism Council (WTTC) contributed about 8.9 trillion US dollars to the world's GDP in 2019 or roughly 10.3%. It also continues to grow at around 3.5%. Travel fuels 1 in 10 jobs worldwide, making it one of the largest "employers" globally.

While business travel will evolve and most likely decline by up to 10% as a result of the current crisis, leisure travel will continue to persist. Even in a connected world, worker migration, coupled with mankind's continuous desire to be going places and meeting loved ones, will not disappear.

And according to STATISTA, in 2018, this desire accounted for more than 80% of all international travel.

2. Governments will come to the rescue 

Governments around the world have responded quickly. As I'm writing this, most major US airlines have reached agreements for billions of US dollars in grants and loans to help them cover payroll costs.

  • American Airlines will get USD 5.8 billion, Delta will receive USD 5.4 billion, United Airlines will reach USD 5 billion, and Southwest Airlines will receive USD 3.2 billion.
  • The government fund of Singapore Temasek Holdings announced a funding package of up to USD 13.27 billion for Singapore Airlines in the single most significant rescue for an airline slammed by the coronavirus pandemic.
  • The latest example is Air France-KLM, with a total of an estimated 11 billion Euro, in aid provided by the French and the Dutch governments.
  • And in Italy, following a COVID-19 related drop in revenues of 87.5% in 2020, Alitalia will, once more, be nationalized in June 2020.

Eventually, limited funds as well as fiscal policies will cause airlines to collapse. While airlines such as Virgin Australia, RAVN, and Air Mauritius have sought to reorganize under applicable local laws, other companies like Flybe have closed altogether. However, governments have shown interest, probably like never before in history, that they are willing to support their nationally registered airlines.


INNOVATION SECURES SURVIVAL -
BRAHMA
 

☝
 

According to Wikipedia, Brahma is the creator of God in Hinduism. He is also known as the creative aspect of Vishnu.

Can Innovation be "The Creator" of a new evolution of aviation?

Yes, it can be.

Any crisis is painful because it means a deviation from business as usual. This applies to both corporations as well as individuals and presents a choice between extinction and change. It is up to each one of us to make a conscious choice to challenge the status quo and transform our everyday practices. The airline industry as a whole has survived many crises in the past - always bouncing back stronger. We hope for this pattern to continue this time as well. However, after every disaster, players in the industry exit the market, and there is no harm in foreseeing a similar situation this time around as well. It's however imperative that all players in the industry must consider a more radical and faster transformation, given the magnitude of this crisis.

Technology will hold the key to success and long term sustainability for the airline industry. Airlines must challenge the status quo of their current operations and realize that the technologies that they once relied on as an enabler, are in today's world often a hindrance to quickly respond to changing conditions.

COVID-19 has demonstrated that airlines today are not prepared to deal with the financial consequences of a crisis of such magnitude. However, one mustn't make a mistake to use the sheer scale of this crisis as an excuse that no business can plan and prepare for. If we review the financial aspects of this crisis, we will see that many other problems are related to inadequate technologies and obsolete practices.

(a) Fare structures: The existing structure of fares (and corresponding rebooking & cancellation fees), dates back to ATPCOs, founded in 1945. This structure, separated from the schedule and the actual inventory, requires an intermediary to create the offer and take the order, which is nothing but a contract for carriage. The challenge for the airline starts when such an order requires amendments in extraordinary situations. How can systems automatically process order changes (different dates, routes, etc.), when the underlying fare conditions do not allow for such changes? How can airlines automatically determine to refund in parts or full or issue a credit voucher for passengers, when system support to do so can often not be event and rule-based?

(b) Wait Times: Call centre wait times, sometimes measured in days, instead of minutes, are the most apparent signs of fundamentally flawed technology and practices. And it once more brutally exposes the fact that many airlines still rely on intermediaries to handle servicing. However, with the closure of travel agents, the responsibility suddenly lies with the airlines, and in the absence of automated offer and order handling, manual processes could shoot through the roof.

(c) Order disruptions: Any order impacted by cancellations during the crisis becomes an exception, resulting in manual handling of an airline's entire set of orders, thus collapsing customer touchpoints in a time when they are more critical than ever.

Airlines that typically have a more optimized workforce and lower passenger per employee ratio, as opposed to smaller carriers are hit even harder by this.

Airlines that are frontrunners in NDC have encountered these problems before. While we could assume that these airlines are better prepared to handle direct customer engagement, they have noticed these deficiencies in the underlying structures and technologies as well. It's worth noting then that the practice of gradually evolving legacy technology has its limitations and that airlines should consider initiating replacement programs now, focusing on modern architected rules and ML-based systems that look at business outcomes through the customer's lens and learn from offer and order management superstars like Amazon.

Airlines should use this window of opportunity to analyse practices and technologies deployed and swiftly respond now. It is less disruptive to implement changes when the business has come to a near standstill, as compared to when the organization is running at maximum capacity. 

The technologies are available. The costs have come down tremendously, and the barriers to implementing change have never been lower.

OUTLOOK

Following the September 11 terrorist attacks, the industry responded relatively quickly to newer screening standards, including enforcing cockpit doors under the leadership of the US forcing other countries to follow suit to maintain air links. This allowed for a much faster return to normalcy. However, it took nearly 15 years for ICAO to finalize its response to SARS.

In the context of the pandemic that we are facing, it will take a robust and determined leadership for this industry to quickly and decisively implement a global protocol for a post-Corona world of aviation to contain the damages of COVID-19. Along with critical crisis management, the same leadership will also have to quickly learn and implement changes to avoid a repeat.

While many uncertainties prevail regarding the length of the crisis and its casualties, I do not know what travel will look like a year from now. But I do know that travel will be back. It is in our human DNA, and it has been so ever since humankind made its first trip, descending from the trees.


Marco Contento is Vice President of Aviation Business Services at IBS. With more than two decades of experience in information technology for the airline passenger services industry, he partners with airlines to help future-proof their business by deploying new generation solutions.

1
Airline staff travel: Countering unpredictability ...
 

Comments

No comments made yet. Be the first to submit a comment
Guest
Wednesday, 08 July 2020

Captcha Image

By accepting you will be accessing a service provided by a third-party external to https://blog.ibsplc.com/